The Shabby and Absurd Reality of the Retirement Pension

[Hankook Ilbo · Opening the Morning · March 24, 2022]

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA) and former President of the Korean Pension Association

For the past five years, claims that we should raise the benefit rate of the National Pension—which pays 43% of income earned during the contribution period—have thrown our society into confusion. This is because, despite the urgency of pension reform, some have argued for further increasing the National Pension benefit rate under the guise of strengthening public pensions.

A strange point in the debate over strengthening old-age income is that there is silence regarding the low benefit rate of retirement pensions. This persists even though the benefit rate of retirement pensions, which require a contribution of 8.33%—hardly different from the 9% contribution rate of the National Pension—falls short of 20%. The frustrating situation of retirement pensions does not end there. Unlike other countries, our retirement pension is not included in old-age income under the OECD classification system. This is because it is not a mandatory system. Since the transition to retirement pensions is left to agreements between labor and management, workplaces that have adopted retirement pensions and those that have not are mixed.

Although most people in stable jobs receive severance pay and are likely to transition to a retirement pension, it is not recognized by international organizations as a source of old-age income. If one purchases real estate with severance pay, they are actually an asset holder; however, due to the OECD standard that calculates the poverty rate based on disposable income, many of them are classified as impoverished older people simply because their cash income is low. Most of the older population, who hold far more net assets than the younger generation, are being classified as having failed to properly prepare for old age. This is one of the reasons why the elderly poverty rate appears high in our country, and it shows that something is badly wrong.

Until now, the Ministry of Employment and Labor, the competent authority, has struggled to pass the default option system through the National Assembly to increase the low returns on retirement pensions and the resulting low benefit rates. The default option is a system that allows experts to act on behalf of retirement pension contributors to increase returns in order to raise the low returns of retirement pensions. The problem is that, due to an ambiguous compromise in the National Assembly, the "Employee Retirement Benefit Security Act" was passed while still including principal-and-interest guaranteed products, which had been identified as the main factor for low performance. This is because, as of 2020, there is too great a difference between the return on principal-and-interest guaranteed products (1.68%) and the return on performance-based dividend products available through the default option system (10.67%).

As of the end of 2020, reserves of 255.5 trillion won have accumulated; therefore, pan-national efforts are even more necessary to correct the reality where retirement pensions, which will increase rapidly in the future, are not recognized as a pillar of old-age income. To improve the returns on retirement pensions, cooperation from the political sphere is necessary, as is the active cooperation of relevant authorities such as the Financial Services Commission and the Financial Supervisory Service. This is because they are approaching it as a financial product rather than focusing on the identity of the retirement pension as a source of old-age income.

Despite the provision of large-scale tax benefits (totaling 5 trillion won for retirement pensions and private pensions, etc.) to activate the old-age income security system, we must seriously accept the reality that retirement pensions have failed to establish themselves as a pillar of old-age income. This is because contributors' dissatisfaction is growing daily, as the benefit rate is miserably low and, unlike the National Pension, it is not operated as a system that pays benefits until the time of death. The Ministry of Employment and Labor cannot solve this problem alone. This is why pan-government efforts are required. Contrary to general expectations, welfare states such as Denmark, as well as the Netherlands and Australia, rely on retirement pensions rather than public pensions for most of their old-age income. This is why our retirement pension must strive further.

Source: Hankook Ilbo (original article)